Good for the planet, suppliers, and balance sheet

Unilever announced in 2018 that it would publicly disclose all of its palm oil suppliers and millers, becoming the first multinational consumer goods company to take this step. The aim: making its entire palm oil supply chain more transparent and sustainable. Besides putting 300 direct suppliers and 1,400 mills under the human rights and environmental microscope, the company said it would also scrutinise middlemen and agents.

The move is a response to public backlash at the environmental degradation and human rights abuses associated with producing one of the world's most widely consumed edible oils. Unilever's announcement came a year after the company pledged to invest $25 million to achieve large-scale deforestation-free agricultural production.

Unilever has also made the business case for supply chain sustainability in its Sustainable Living Plan, launched in 2010. Supply chain sustainability and transparency helps the company secure supplies and reduce risk and volatility in its raw material supply chains, and offers opportunity for innovation. And it's not just palm oil. Unilever has announced plans to increase transparency and sustainability in its supply chain across a number of products.

Bolstering supply chain transparency is a step that many businesses may be taking soon. Sustainable and transparent supply chains are about more than just staying within the rules or keeping up appearances: They make business sense.

A 2018 report by international sustainability strategy agency Futerra is a case in point. Published in partnership with the Consumer Goods Forum, the Honest Product Guide encompasses market research with consumers in seven countries and more than 70 companies worldwide, including members of the Consumer Goods Forum. The data show that 55% of consumers want more information on social, health, environmental, and safety issues with regard to their purchases, and that 70% of consumers surveyed "are most interested in transparency about products" whilst only 30% are concerned about who made the products.

There is more: According to Label Insight's 2016 Transparency ROI Study, 94% of consumers are likely to be loyal to a brand that offers complete transparency, and 73% are willing to pay more for products with completely transparent supply chains.

Companies taking charge

These trends are not going unnoticed within the global private sector. Some companies are gearing towards transparent and sustainable supply chains, giving their customers a clear insight into how their goods and products are sourced, farmed, and manufactured. This is to assure consumers that their purchases do not involve any form of exploitation such as child labour and slavery, do not contribute to degradation of the environment, and foster overall human wellbeing and healthy ecosystems.

South African food and clothing retailer Woolworths, for instance, is focusing on the traceability and ethical production and sourcing of its clothes, homeware, fresh produce, canned foods, and other products.

"Our customers frequently ask us for more information on where we source our products," said Lawrence Pillay, Woolworths' group head of sourcing, in a statement. "The reputation of our brand is based on the products we sell and our customers' experience, so it is critical for the sustainability of our business."

The company employs teams of sustainability and technical experts in each of its departments. These staff members work closely with the company's suppliers, which are vetted and held accountable for their sustainability practices.

"All our suppliers and service providers, whatever their location, are bound by our Code of Business Conduct, which is aligned with the International Labour Organization's conventions in relation to ethical trade," Pillay said. "Suppliers undergo regular social compliance checks conducted by independent auditors and are required to supply audit reports from independent auditors to ensure they meet the standards of the codes."

No quick fix

What it takes to make supply chains transparent depends on the nature of the company, its supply chains and objectives, and how far it wants to go.

"Most businesses start out by looking at their top suppliers by spend," said Simon Clarke, director at South African sustainability advisory firm IBIS Consulting. "This is a good place to start but may potentially result in missing smaller suppliers on which you are not spending a lot, but which are key in your supply chain and, therefore, pose both a possible sustainability risk but also an opportunity."

A typical supply chain transparency journey for established businesses, therefore, starts with getting a clear understanding of the landscape through a mapping exercise. This helps companies understand which suppliers are used, where their materials and products come from, and how much they are spending on these.

"The second step is to look at and manage the risks and vulnerabilities within the supply chain," Clarke said, noting that based on this, companies can work with their suppliers towards greater levels of transparency and sustainability. (Also, see the sidebar, "The Benefits of Sustainable Supply Chain Officers," below.)

Smaller companies embrace transparency

Multinationals tend to attract the most attention with their intentions and achievements in supply chain transparency, but smaller businesses are disrupting the landscape, too. This certainly applies to companies that have embraced sustainability and transparency from the start. For some of them, supply chain transparency is built on trust and close relationships as much as public statements.

Bean There Coffee Company, South Africa's first roaster of certified fair trade African coffees, is a good example. Established in 2005 in Johannesburg, the venture has two roasteries and various coffee shops across South Africa selling ethically sourced and produced coffee from Burundi, the Democratic Republic of Congo, Ethiopia, Kenya, Rwanda, and Tanzania.

"Knowing where our coffees come from, and knowing our supplying farmers personally, is a key aspect of our business," said founder JonathanRobinson. He said that Bean There buys over 100 tonnes of African Arabica coffee beans per year from smallholder farmers in the aforementioned countries, cutting out as many middlemen, sales agents, and other third-party service providers as possible, whilst ensuring that the farmers receive a fair price for their coffee. This is the principle of direct fair trade.

"We visit our suppliers each year to maintain our relationship with them and to discuss the price they are receiving and to ensure that the money we are paying is received by the individual farmers which make up the co-operative. During our visits, we sit down and talk with them about their products and hear about whether they are happy with the price they are receiving. We look at numbers and make sure everything adds up, from both sides."

The direct fair trade approach allows Bean There to consistently pay its producers a higher price than conventional coffee companies do, regardless of coffee price volatility.

"In 2018 the coffee price was extremely low, but we continued to pay higher prices. We certainly could have paid less than we did, but we want to be assured of great coffee, and we want to keep supporting communities and delivering exceptional coffee to our customers," Robinson said. 

Blockchain put to use

Beleaf & Co., a South African importer of sustainable and socially responsible teas, also operates according to direct trade principles but is taking its transparency mission a substantial leap further. The tea retailer is preparing to use blockchain to track the production, purchasing, value-add, and transport activities of its tea supplier in Malawi.

The technology, which produces auditable and unchangeable data that allow for verifiable transparency, is helping companies like Beleaf & Co. record and publicly disclose every business step — in this case, which kilogram of which tea was picked by which picker from which farm in which country, how much the picker was paid, and whether Beleaf & Co. paid more for its teas than conventional companies.

"Some of our teas cost us $50 per kilogram, whilst mass-produced tea fetches $5 per kilogram at auctions," co-founder Nishanthi Lambrichs said, noting that blockchain also helps record and publicly disclose all costs incurred, from value-added fees to transport expenses. "Shipping tea to South Africa by plane costs us between $10 and $30 per kilogram. Some of our teas cost us $70, including buying and shipping."

The idea is to print QR codes on the packaging, allowing Beleaf & Co.'s customers to retrace the product's origins from farm to cup. "Eventually all of our farms will be put on blockchain," Lambrichs said.

The cost of transparency

So how much does it cost to make a company's supply chain more transparent? Clarke said that this varies from firm to firm.

"This depends on the size and complexity of the supply chain, the industry the client is in, and where the client is in their sustainable supply chain journey," he said.

Woolworths does not report on how much it is investing in the transparency and sustainability activities outlined in its Good Business Journey. The only information available are data around the development and training of — and procurement from — enterprise development beneficiaries. Its 2018 Good Business Journey report shows that the retailer's total procurement spend with 49 enterprise development beneficiaries was ZAR 246 million ($17.1 million) in the 2017—2018 financial year.

Beleaf & Co's blockchain mission is complicated due to the nature of the business, which comprises many steps, from farming, transport, and packaging to selling to various retailers. "Putting our pilot phase in Malawi on blockchain costs $30,000 for the first phase, which revolves around data collection. The second phase costs about the same. We are currently raising funds for that," Lambrichs said.

Business imperative

Agreeing that $30,000 is a lot of money for a small business, Lambrichs said these expenses will pay themselves back. Transparency and sustainability form part of the Beleaf & Co. story and are key reasons why the company is in business. "People buy our teas and stores stock our products because of the quality and our story," she said. "Today's customers ask more questions about what they buy and are willing to pay more for it if this results in higher wages for producers and farmers."

Robinson agrees. Besides being good for its suppliers, Bean There's direct trade approach and paying farmers better wages — and involving suppliers in their business — benefits the company, too. "The commitment we show our suppliers results in them being committed to us and treating us very well in return by reserving their best crop for us," he said. "This is good for us as we want to be known as a company that sells the world's best coffee whilst making a difference in the lives of African coffee smallholders."

When it comes to large companies, Darlington Onojaefe, Ph.D., senior lecturer at the faculty of business and management sciences at Cape Peninsula University of Technology in Cape Town, said he thinks that the only way they can make their supply chains more transparent and sustainable is if they are serious about their endeavour and treat it as a business imperative rather than a box-ticking exercise. "Listening to consumers is key," he said.

The benefits of sustainable supply chain officers

They boost companies’ environmental sustainability and social responsibility credentials, thus business attractiveness and profits.

Sustainable and ethical business operations are no longer a box-ticking exercise. In developed and emerging markets, shareholders, potential investors, and customers are increasingly pushing companies towards taking into account the environment and the wellbeing of communities and employees.

Asserting that your business is taking sustainability seriously — and reporting on the implementation of internal measures and targets whilst mitigating sustainability risks — is not enough. Although you may be running a sustainable business, there’s a risk that your suppliers could potentially be guilty of exploitation, human rights violations, or environmental degradation.

This is where sustainable supply chain officers come in.

Although they may not be suitable for smaller companies with a limited footprint, for companies with extended supply chains, an effective sustainable supply chain manager looks not only at what is most affordable and costefficient, but also at what is right in the eyes of a business’s customers, increasing brand trust and loyalty.

These experts know their organisation’s internal environmental, social, and economic sustainability objectives inside out and are specialised in embedding those in its supply chain.

“Sustainable supply chain managers know what will affect their organisation’s sustainability image and performance, both positively and negatively, now and in the long run,” said Darlington Onojaefe, Ph.D., senior lecturer at the faculty of business and management sciences at Cape Peninsula University of Technology in Cape Town.

Simon Clarke, director at South African sustainability consulting company IBIS Consulting, advises firms to consider hiring or outsourcing different experts to share the task, each with their own mandate, and have them work as a team. “Sustainability is a broad topic. A sustainable supply chain manager needs to understand all issues within a company’s supply and value chain,” he said. “Some are social, economic, environmental, or even health- and safety-related. It may be difficult to find one single person who can do all of this.”

A sustainable supply chain officer should ideally be tech-savvy and willing to explore new technology to boost supply chain transparency.

Yet technology such as blockchain will not replace sustainable supply chain officers or other specialised staff. “Technology can enhance their job description and enable them,” Onojaefe said. “The human factor will always be needed.”

Miriam Mannak is a freelance writer based in South Africa. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.